Jon Shayne's Blog

Friday, February 22, 2019

This is a particularly nice passage on investing by James Montier, of GMO:

Now, of course, valuation is an excellent guide to long-term returns, and a terrible guide to short-term returns. This means that in the short term there is observational equivalence between being early and being wrong. I am regularly told either that valuation is irrelevant (or my favoured measures are irrelevant), or asked what the catalyst for a decline would be.

As I have confessed on prior occasions, I seem to be afflicted by a rare form of Tourette Syndrome, where I am compelled to tell the truth, and so I reply that I have no idea what the catalyst will be. Indeed, think back to the tech bubble of the late 1990s (or any other previous bubble for that matter). Can anyone tell me the catalyst for the market having a Wile E. Coyote realisation? I can’t, even with the benefit of 18 years of 20/20 hindsight.

In many ways, valuation seems to suffer Cassandra’s curse. For those who may have forgotten the tale, Cassandra was a priestess in the temple of Apollo. Apollo himself took a shine to Cassandra and decided to woo her, or more precisely to seduce her. In pursuit of his fancy, Apollo granted Cassandra the gift of prophecy in an attempt to win her over. However, Cassandra was a very chaste priestess and spurned Apollo’s advances. Being a typical capricious and vengeful God, Apollo didn’t handle rejection well, and cursed Cassandra. Rather than rescind his gift of prophecy, he ensured that Cassandra’s prophecies, whilst true, would never be believed. Valuation suffers a similar curse…just when it is most informative, it is least believed.

Montier thinks well, and writes well. The whole piece, titled "The Late Cycle Lament," and dated December, 2018, is online.

Monday, December 11, 2017

I've mentioned the Odd Lots podcast before. It is very smart, and a lot of fun. The hosts are Bloomberg's Joe Wiesenthal and Tracy Alloway.

A recent episode is one of their best. In it, Andrew Lo, of MIT, describes financial markets as a mix of both the neat efficiency described by neoclassical economics, and the messy emotion and misjudgment described by behavioral economics. Most of the time, market are fairly efficient, but on occasion, emotion takes over and fear or greed become dominant. That may seem like common sense, but I have not heard these two opposing views squared so well before.

One particular point Lo makes is that biology or ecology makes a better model for markets than physics. In ecology, there are things to count and measure, like the number of animals in a species and their weight, but there are also facts that are soft, and not readily modeled in equations. What does a species of animal feed on? What preys on it?

Switching back to investing, the advent of ETFs has increased the popularity of index investing, and this needs to be thought of ecologically. The growth in ETFs will hit its limit, as a proportion of the total, at some point. If you look only at price/earnings ratios, for example, it is hard to understand why the stock market has moved as it has. You have to look at the institutional structure of a market, too, which changes over time. Who are the players, at any given point? What are their constraints?

In other words, financial markets are complex adaptive systems, Lo says. They cannot be modeled fully, and are prone to breaking down. William White has said the same.

Anyway, I recommend this episode. I get it on my phone's podcast app, but you can also listen on the web via the first two links above. If you get into it, you will also like the recent Odd Lots episode with Citigroup's Matt King. King describes quantitative easing in a way that is entirely consistent with how Lo sees things.

Thursday, January 5, 2017

This is a good interview, from last week, with the economist
Robert Shiller. Topics include the current state of markets, the economy, and animal spirits,
post-election. It is in the English version of Finanz und Wirtschaft.

While I'm at it, there was second good piece at the same site last week. This interview, on the hole central banks may be in, is with William White, former chief economist of the BIS.

Because he does what he does, Demarest has deep insights into what civilizations look like before they collapse.

One of his ideas is that florescence, which we see in the pyramids of the Maya, and in the art and architecture of the Renaissance, is often a sign of trouble, not health. Grand projects of this kind historically have preceded, and often contributed to, collapse. A related point of his is that even as highly specialized, hyper-connected economies create wealth, they are much more vulnerable to catastrophic disruption than simpler ones.

About Me

I analyze securities and manage portfolios through Shayne & Co., LLC (www.shayneandcompany.com), an investment advisory firm in Nashville. Sometimes I sing, or try to sing, country songs about finance, under the name "Merle Hazard."
I try to discuss ideas here, rather than individual companies or securities. (Where I do mention a company or security, my firm and I intend no recommendation. Firm clients and I may have held, or may presently hold, an investment in any company or security mentioned.)